China Looks to Boost Bank Lending with New QE Policy

By Erica DeMond ’17

Chinese People's Bank, Beijing, ChinaSlowing growth in China has been a cause of global concern. After averaging at a growth rate of 10% over the past decade, China’s target growth rate for 2015 was set to only 7%. In line with the country’s dampening growth, the People’s Bank of China has recently introduced its largest quantitative easing effort since the global financial crisis of 2008: Pledged Supplementary Lending. This stimulus aims to increase struggling banks’ lending power and boost weak consumer demand.

China’s debt has risen to unsustainable levels, reaching over 250% of GDP so far this year. The credit boom that helped the country’s economy get through the 2008 global financial crisis has now come back to haunt it. Much of this credit went toward property developers and the housing market. Paired with positive consumer expectations of the real estate market, housing prices rose steadily through spring 2014. However, demand could not keep up with this overdevelopment and housing prices are dropping at an accelerating rate, posing concerns for investors and homeowners. Combined with excess industrial capacity and decreasing financial inflows from softening exports, these factors have led to a worrisome increase in the government’s financing gap, which has reached 2.7 trillion Yuan (or 3.7% GDP) this year.

The PBoC’s new Pledged Supplementary Lending program is meant to address these concerns and reign in government debt. The debt has mainly come at the local level, which accounts for about 25% of total Chinese debt growth since 2008. Accordingly, the new lending program focuses on local governments. Pledged Supplementary Lending uses a debt-for-loan swap method, letting commercial banks purchase local-government bonds as collateral for low-interest, three-year loans from the central bank. This policy aims to prevent a shortage of lending funds for struggling banks and encourages loans specifically to small and private businesses.

Some claim that China is employing similar methods as the European Central Bank and their long-term refinancing operations (LTRO’s). The ECB introduced LTRO’s in 2011, spending trillions of Euros in three-year loans to boost lending for struggling banks. However, others assert that there are only surface-level similarities between these policies. They argue that while the ECB relied on LTRO’s to increase liquidity in their banking system, the PBoC’s main goal is to control the allocation of lending to certain sectors. In addition, unlike the US, Japan, or the EU, China has kept positive interest rates, which may suppress commercial bank borrowing from the PBoC. However, if China at all follows the monetary easing trends of other developed countries, Pledged Supplementary Lending may only be the first step of a larger expansionary effort.

Sources:

http://www.economist.com/blogs/economist-explains/2015/03/economist-explains-8

http://www.forbes.com/sites/mikepatton/2015/04/23/the-china-syndrome-is-china-headed-for-a-financial-meltdown/2/

http://seekingalpha.com/article/3112216-chinas-new-qe-program-could-be-trend-changing-news?ifp=0

http://www.wsj.com/articles/china-readies-fresh-easing-to-tackle-specter-of-debt-1430206169?KEYWORDS=china+quantitative+easing

http://ftalphaville.ft.com/2015/04/28/2128002/a-chinese-ltro-the-trouble-with-market-based-financing-continues/

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